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A partnership is a legal entity where two (or more) people run a business.
Like a sole proprietorship, each partner owns a portion of the assets and
liabilities of the business. The main difference is that a partnership relies
on an agreement between the partners. This document, the partnership agreement,
details ownership and responsibilities.

Starting a Partnership

Creating the partnership agreement is the most important step. It will
lay out the relationship between the parties. For a general partnership
(see Limited Liability Partnership for another type) this will shape many
aspects of the business. Some things included in a basic agreement:

Business Name

More important here than in a sole proprietorship because partners will often share business accounts and act in the name of the business.

Contributions

Each partner's stake in the formation and ongoing finances of the business must be clearly laid out. How much will each put into the pot? What about future obligations?

Distributions

How will profits be split between partners? Who gets paid first and how much?

Ownership

Who gets what if the business is sold? What happens if one partner wants to withdraw? What about taking on new partners? What are the options for buying out another partner?

Decision Making

Who gets the last say? What about day-to-day management decisions?

Disputes

How will disputes be handled? Is binding arbitration a good option or will things have to go to court? Does a ‘silent partner’ have a say in business operations?

Critical Developments

What happens if one partner gets sick or dies? How will the business be evaluated (and what is the split) if a buy-out offer comes in? What provisions will be used for retirement? Under what circumstances can the partnership agreement be modified, and how?

These are the most common issues. You should see immediately one
of the downsides of a partnership – a substantial difference of opinion
between partners. What starts out as a wonderful relationship can change
into a phenomenal burden over time and under the stress of doing business.

The best recommendation is to get help when drawing up a partnership agreement.
Make sure each party fully understands the conditions and include as much
detail as possible. It is a wise practice to consult an attorney to ‘vet’
the agreement and point out weaknesses.

Partnership Taxes

Partnerships keep the same tax benefits as sole proprietorships. The
tax rate is based on income from the business as personal income. The
term for this is pass through. That is, the tax obligation passes
through the business to the owners. One difference may be that a partner
who doesn't pay his taxes might accrue a debt with the IRS – making
other partners liable. Although the business assets are the actual
target of the IRS, these are spread out to other partners and the
obligation can pass through to the other owners.

Partnership Liability

Partners are jointly and severally liable. When the business gets
sued, each partner can be drawn into the case. A judgment will apply
to all concerned parties. Just as the taxes pass through, so do the
liabilities.

Like a sole proprietorship, this is considered a major disadvantage
of a general partnership. There are thousands of examples of one partner
acting unethically or even criminally and drawing an innocent into
trouble. While you might not be held criminally responsible for
something your partner does, any benefit that the company received,
you received also. This is the logic used in lawsuits and in trials.

Less serious, but perhaps just as troubling is non-performance.
You will be contractually obligated to anything a partner agrees to
in the business name. The only real prevention is good communication
between partners. Keep it open and honest. A breakdown almost always
leads to the death of a partnership.

Partnership Credit and Financing

Loans are easier to get under a partnership agreement simply because
there are more people cosigning. Having multiple partners ‘on the
hook’ means banks have more resources to attach should things go
badly. Other than this, financing is handled in much the same way as
with a sole proprietorship. Usually, a business is split up (in the
partnership agreement) along the lines of how much each partner
brought into the startup. Ownership is often based on these lines but
might be modified if one partner brings a necessary skill (that the
other lacks) or physical asset.